J.P. Morgan & Co.'s bonds may suffer if other ratings agencies follow the lead of Moody's Investors Service and cut the venerable banking company's ratings again.

Last week, as expected, Moody's downgraded Morgan's senior debt to A1, from Aa3, and the rating of its subsidiary Morgan Guaranty Trust Co. to Aa3, from Aa2, because of concerns about the company's short-term earnings potential.

About $97.8 billion of the company's debt is affected.

"J.P. Morgan has successfully transformed itself into a major securities firm," Moody's said in a press release. "However, the marked improvement in J.P. Morgan's investment banking franchise has not yet led to growth in earnings, which have been on a plateau for several years."

Few were surprised by the downgrading. Moody's had put the company on review for a possible downgrading in October because of losses from exposure to volatile foreign markets.

In March another major ratings agency, Standard & Poor's Corp., stripped Morgan of its precious AAA rating after it had announced disappointing fourth-quarter results for 1997. Moody's downgraded Morgan in April.

In the credit market, J.P. Morgan's debt issues showed little reaction to the downgrading on Wednesday, primarily because trading volume was thin. Morgan's 10-year debt traded at 125 basis points over Treasuries Wednesday, where it has traded for several weeks.

The effect of the Moody's action may be felt as investors return from the holidays, particularly if other rating agencies follow suit.

Some investors may be forced to jettison Morgan debt if their portfolios are not permitted to hold bonds rated below a certain point.

"There could be some people who start to get concerned about it," said bank bond analyst John Otis. "One downgrade alone may not necessarily do it, because Standard & Poor's still rates the company AA, but Moody's action leaves the company at risk for another agency to downgrade."

Tanya Azarchs, a ratings analyst at Standard & Poor's, said the agency is not considering a downgrading of Morgan's debt.

"We do feel that their underlying core business has a chance of showing its true colors next year, and it's a trend we will be watching," Ms. Azarchs said. "Obviously if our expectations are not fulfilled, we can reconsider the rating at that time."

Some bond experts argued that the rating is appropriate, considering that J.P. Morgan is more an investment house than a commercial bank. But Mr. Otis of Bear, Stearns & Co. called the Moody's downgrading "punitive."

Mr. Otis acknowledged that the next several quarters are likely to be rocky for Morgan, but he disputed Moody's conclusion about its results, asserting that "earnings have not reached a plateau."

J.P. Morgan's return on equity has suffered because of expense growth, which is expected to decline, as opposed to weakness in revenue growth, Mr. Otis argued in a report to clients Wednesday.

Mr. Otis said Morgan eventually will be able to go toe-to-toe with other securities firms as they pursue more lucrative business. "We believe the company already has sufficient market share to be a successful global securities firm," he said.

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